Educational Articles

Stock Screen: Best & Worst Performing Industries - June 27, 2014

Robert M. Greene, CFA
| June 27, 2014

Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).

The six-week period covered in our latest Industry Price Performance rankings was a solid stretch for equities. In all, the Value Line Arithmetic Average rose 2.9% between May 13th and June 24th, and the leading market benchmarks were in the black, as well. From an industry perspective, Biotechnology separated itself from the pack, climbing 11.7% during this period, to finish 500 basis points clear of its nearest competitor. Technology stocks were also in particularly high demand, with tech-related industries holding down four of our top spots: Computer Software (up 6.7%), Internet (6.3%), Semiconductor (6.3%), and Semiconductor Capital Equipment (6.0%).

In looking for investment ideas, we are focusing our attention on the Petroleum Producers, which tied Semiconductor Capital Equipment and Hotel & Gaming (all up 6.0%), for the fifth spot in our industry rankings. Energy-related stocks, in general, have been strong performers so far in 2014. For its part, the Petroleum Producing group made frequent appearances on our Best Performing list during the spring, last appearing among our top seven in mid May.

As is usually the case, rising energy prices have been a key to the share-price gains. Most of the action early in the year was in the natural-gas markets, with a cold winter and declining inventories providing a long-awaited boost in prices for domestic natural-gas producers. Since then, though, oil has been a primary catalyst. Most recently, international developments, particularly the rising turmoil in Iraq, have been pushing crude prices higher, providing a healthy backing wind for this group of equities during the final weeks of spring.

Two of the stocks leading the Petroleum Producing industry to a spot in our latest Best Performing list were Continental Resources (CLR) and Canadian Natural Resources(CNQ.TO), the shares of which advanced 12% and 11%, respectively, in price for the period under review. The gains, though, were fairly broad-based. Other than Range Resources (RRC), in fact, each of the stocks in the group outperformed the broader market during this stretch.

Looking ahead, momentum-oriented investors will find no shortage of worthwhile selections among the Petroleum Producers. Indeed, our Timeliness Ranking System pegs more than half of these stocks to outperform the broader market in the year ahead. However, the strong share-price gains seen across the group already in 2014 mean buy-and-hold investors will need to proceed more cautiously. Most of these equities now offer below average price-appreciation potential to 2017-2019. Among those that still merit consideration as a long-term holding is Canadian Natural Resources which we profiled in early May in a previous review of best and worst performing industries. This time around, though, we are focusing our attention on Oasis Petroleum (OAS), which also offer healthy upside for the 3 to 5 years ahead.

Oasis Petroleum is a new addition to our coverage of the Petroleum Producing Industry, having made its debut in The Value Line Investment Survey in early May. The Houston-based driller has been in existence for less than decade— its predecessor company was formed in 2007. Since then, though, it has established itself as a key player in the Williston Basin of North Dakota and Montana, acquiring more than 500,000 net acres in the area. These holdings provide it with substantial drilling opportunities in the Bakken and Three Forks formations, the former of which is considered the second-largest tight-oil play in the United States (based on proved reserves).

Oasis’ production is skewed heavily toward oil, which accounts for about 90% of output. Volumes made a big jump in the final months of 2013, averaging 42,100 barrels of oil equivalent per day in the December quarter, which represented a 27% improvement from the September period. Production rose another 2% sequentially in the March quarter (5% after adjusting for an asset sale), and should continue to climb as operations mature over the course of 2014. For starters, the company aims to complete nearly 150 net operated wells this year, up from 106 in 2013. Too, the driller’s efforts should get a boost from improvements in its well completion techniques. During the second half of the year, about 20% of its drilling activity will utilize slickwater fracs. The wells that have been tested using this technique have experienced a healthy uplift in output. In all, production should reach 46,000 to 50,000 BOE/day for the year, which would represent a 35%-45% increase from 2013’s average tally.

Like many exploration and production companies, Oasis relies on external financing to help fund its growth at this stage of its development, with long-term borrowing currently accounting for more than 60% of capital. The company’s plans call for about $1.4 billion in capital spending this year, which will likely exceed its operating cash flow by a wide margin. The aforementioned asset sale, which brought in more than $300 million, while putting only a modest dent in current production, should help to cover the shortfall. The company, though, will also likely take on more debt, with long-term borrowings likely reaching $2.75 billion by the end of 2014, up from $2.54 billion at the start of the year. Overall, we think Oasis will have sufficient liquidity to fund its development projects in 2014 and beyond.

Oasis stock has enjoyed healthy support from investors in 2014. Its year-to-date share price gains of 10% are fairly pedestrian in comparison to some of its peers in the Petroleum Producing group, but are comfortably ahead of the returns on the leading equity benchmarks. Moreover, we think this equity stands a good chance of outperforming the broader market in the six to 12 months ahead. Looking further out, the company’s promising growth prospects in the Williston Basin should put OAS shares in good position to produce above-average price appreciation to 2017-2019. And while the driller has a sizable (and likely growing) debt load, its stock doesn’t appear to be excessively risky, carrying a rank of 3 (Average) for Safety. On the downside, Oasis doesn’t pay a dividend, and we think developing its properties in Montana and North Dakota will continue to take precedence over returning cash to shareholders in the 3 to 5 years ahead.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.